At last, we bust the biggest refinancing myths out there.
Have you given your mortgage a health check recently? Whether you are looking to lower your monthly repayments, restructure your loan or access more flexible options, refinancing may be a viable option.
There are many myths surrounding refinancing, with the general perception being that it’s complicated, expensive and best left in the too-hard basket. The truth is that refinancing is quite straightforward and more affordable than you think.
Refinancing Myth 1: There are too many hidden fees associated with refinancing.
On 1 July 2011, the Government abolished exit fees. Lenders are now banned from charging borrowers exit fees (like deferred establishment fees) on new loans, although fixed loans and loans prepared before 1 July 2011 still incur early repayment costs.
- Matt won Broker of the Year in 2014 at the Better Business Awards in QLD, as well as Best Residential Broker
- He is a Mortgage Choice broker based in South West Brisbane.
Queensland Broker of the Year, Matt Cunliffe from Mortgage Choice, Brisbane, warns that there are still fees to take into consideration. Smaller charges like document preparation fees, settlement attendance fees and title fees from both your outgoing bank and new bank are likely to be charged to borrowers. Some banks have set fees for these on top of other charges, others will include them in their settlement or establishment fees and some charge these fees on a case-by-case basis.
Extra charges come into play when borrowers are looking to increase their loan, change to a fixed rate amount, or need to borrow more than 80% of the property value. In these instances stamp duty may need to be paid and or Lenders Mortgage Insurance (LMI) taken out on the extra loan amount.
Banks and lenders vary significantly in their fees and charges but there are some unavoidable refinancing charges that are actually applied by the government rather than the lender. Each state has a set loan registration fee of between $100 and $160. Borrowers are required to pay this twice – once to deregister the loan with the previous lender, and then again to register it with the new lender.
The standard costs associated with establishing and/or exiting standard variable rate home loans with the big four banks are outlined below.
|Bank||Standard Variable Rate Mortgage Product||Interest Rate||Discharge Costs||Establishment Costs|
|CBA||Standard Variable, No Fee and Base Home Loans||5.20% p.a. (5.20% comparison rate)||$0||$0|
|NAB||NAB Tailored Home Loan||5.08% (5.45% comparison rate)||$350 discharge settlement fee|
$0* (*$600 loan approval fee is currently waived on all new loans)
$8 monthly service fee
Simplicity Plus Basic Variable Rate
5.18% (5.23% comparison rate)
|$160 settlement fee + fees to access government records and lodge paperwork.|
$600 loan approval cost is currently waived upon request.
No ongoing monthly fee.
|Westpac||Rocket Repay Variable Rate|
5.48% (5.62% comparison rate) *from 4.78% with Premier Advantage Package
Discharge settlement fee $350
$600 Loan establishment fee
$8 monthly service fee
Premier Advantage Package: $350 p.a., no establishment or monthly service fee.
Note: These figures are current at the time of writing.
Lenders are required to provide all standard costs associated with their loan products so there shouldn’t be any surprises when it comes to fees and charges. Individual refinancing situations vary considerably; however, be sure to ask specifically about fees and charges that may affect you.
Refinancing Myth 2: Refinancing is expensive and negates the benefits of a lower interest rate.
Using the data in the table above and the Mortgage Switching Calculator from Money Smart, we tested this myth with a case study:
Jim and Maria have owned their home in Queensland for three years and have a mortgage of $430,000. They have a Rocket Repay variable rate loan with Westpac. It has an interest rate of 5.98% and they repay it weekly. While Jim and Maria are happy with the options available to them, they feel the interest rate and ongoing costs are too high and have decided to switch to the no fee option with a 5.20% interest rate that Commonwealth Bank offers.
If they stayed with Westpac, Jim and Maria would pay a minimum of $678 per week and $401,286 in interest and fees over the course of the next 22 years.
If Jim and Maria move to the Commonwealth Bank, they will have to pay $350 in discharge settlement fees and $314.80 in third party registration fees ($157.40 x 2). It will take them three months to recover the $665 in switching costs and their minimum weekly repayments will be down to $632. They will save $84,415 in interest and two years and five months off the life of their loan.
The benefits can quickly outweigh the expenses in many refinancing situations, particularly when you are doing a straight transfer and your LVR is less than 80%. If you are looking to consolidate debt or incorporate more flexible options, refinancing may be necessary and it can definitely still be to your advantage. Working with a financial planner or mortgage broker and have a specific budgeting strategy in place will help you make your loan work for you.
Refinancing Myth 3: All of the incentives that are currently being advertised are just marketing gimmicks.
According to Cunliffe, the incentives that banks are offering to pay the switching costs or pay rebates are definitely of some help. “Incentives are being offered to combat the retention processes that banks have in place to match offers when they get word of a client looking to discharge. By providing a contribution, it makes the costs somewhat irrelevant and a marginally cheaper rate or more preferred loan structure and features can see a refinance proceed with little concern for the imminent fees.”
Instead of being wary of incentives, use the fierce competition in the market to your benefit. If the bank you are considering is not offering a particular incentive or package, be sure to ask before you shut down that option because they are often available upon request or are willing to match it.
Refinancing Myth 4: Refinancing is not worth the effort
If you remember the process of buying your house as being stressful, keep in mind that refinancing is much more straightforward and less emotionally driven. Since that time, your personal situation has likely changed and the mortgage products available have become more competitive so it’s worth looking again. Ideally you should review your mortgage annually but now is the next best time. Approximately 33% of all mortgages sold in the past year were refinances according to AFG.
If you have a good relationship with your bank you can speak with them or keep an ear out for good deals and market trends. Cunliffe advises speaking with a broker to streamline the process and find out if it’s worth refinancing. “Not only will they be able to help with reviewing your current loan setup against the different offers in the market, you will be able to calculate the costs vs the benefits of refinancing.”
Some other considerations
If you are considering refinancing your mortgage, beware that the interest rate is not everything. Other variables will also come into play:
- The relationship you have with your current lender. If you have a good relationship with your bank they may be willing to work with you to adjust the terms of your loan or match a competitor’s interest rate or terms.
- Other debt and accounts that you might want to consolidate and bundle. What packages does the bank offer?
- How long have you been paying off your current loan? If you are more than half way through your loan, it may not be advisable to enter into another long term loan.
- The flexible features available. Features on the new loan including an offset account, flexible repayments and redraw facilities may also help you pay your loan off quicker.
- The comparison rate. As a general rule, the closer the comparison rate is to the advertised interest rate, the fewer fees and charges are added on to the loan. There are many exceptions to this rule but it’s worth being aware of.
Refinancing a home loan isn't complicated and can save you thousands and years off your mortgage, so it's worth starting a comparison today. You can compare the home loans below to get you started, or if don't have as much time or would prefer an expert to help you, click the 'speak to a mortgage broker' tab to contact an experienced mortgage broker.
Compare refinancing home loans
Rates last updated January 18th, 2017.
- ME Flexible Home Loan Fixed - 3 Year Fixed Rate (Owner Occupier)
Comparative rate increases by 0.07%
January 4th, 2017
- ME Flexible Home Loan With Member Package - LVR <=80% $400k up to $699,999 (Owner Occupier)
Comparative rate increases by 0.10% | Interest rate increases by 0.10%
January 4th, 2017
- ME Basic Home Loan - LVR <=80% Owner Occupier
Interest rate decreased by 0.10%
January 4th, 2017